Feds waived appeal in rehabilitation case, Wisconsin Supreme Court concludes

By Joe Forward, Legal Writer, State Bar of Wisconsin

March 12, 2012 – The federal government’s failure to preserve issues in the Dane County Circuit Court means it can’t appeal those issues now, the Wisconsin Supreme Court has ruled.

With a $700 million tentative tax refund at stake, the U.S. Justice Department wanted to appeal a circuit court order that blocked the Internal Revenue Service (IRS) from pursuing claims against the segregated account of a deteriorating financial guaranty insurer.

But in Nickel v. United States, 2012 WI 2012 (March 8, 2012), the Wisconsin Supreme Court unanimously said no, concluding the U.S. waived its ability to appeal the circuit court order.

Rehabilitation Act and tax liability

Wisconsin’s Insurers Rehabilitation and Liquidation Act allows state intervention to protect creditors and policyholders from the failure of a financially troubled insurer.

In 2010, Wisconsin’s then-Commissioner of Insurance, Sean Dilweg, proposed a rehabilitation plan to assist Ambac Assurance Corp., a Wisconsin-based financial guaranty insurer that was financially troubled. The rehabilitation plan established a “segregated account” to separate potentially damaging liabilities from Ambac’s general account, liabilities such as mortgage-backed securities and other risky financial products, to be rehabilitated through protective measures.

One of those protective measures prevented the IRS from pursuing claims against the segregated account, which included a federal tax liability. Specifically, the IRS gave Ambac – through its parent corporation – a $700 million tentative tax refund for corporate taxes.

Tentative tax provisions are designed to give ailing companies cash refunds quickly based on tentative estimates, but the IRS is entitled to later examine whether the full refund is allowed.

The rehabilitation plan temporarily prevented the IRS from seeking tax liability payments from Ambac’s segregated account if an examination revealed a corporate tax liability outstanding.

Appeals court decides based on pro hac vice rules

The U.S. and the IRS had received notice of the court’s rehabilitation plan confirmation hearings and the injunction, which allowed interested parties to object within 45 days of the order. The U.S. did not object to the order, and it did not appear at the confirmation hearings.

Instead, the U.S. tried to remove the case to federal court, and filed a notice of appeal in state court to reserve that right, signed by an attorney from the tax division of the U.S. Department of Justice (DOJ) who was not licensed to practice law in Wisconsin.

The notice asked the state appeals court to hold the appeal in abeyance while the federal court decided whether it had subject matter jurisdiction (note: a U.S. District Court in Wisconsin ruled that the federal court lacked subject matter jurisdiction to hear the case. The U.S. has appealed the case to the U.S. Court of Appeals for the Seventh Circuit.).

Meanwhile, a Wisconsin appeals court granted the Wisconsin Insurance Commissioner’s motion to dismiss the federal government’s appeal, concluding that state statute requires all filings in the Wisconsin state courts to be signed by a Wisconsin licensed attorney, or by a non-resident attorney admitted pro hac vice. The DOJ lawyer was not admitted pro hac vice.

On appeal to the Wisconsin Supreme Court, the U.S. argued that federal law preempts any state law or regulation that precludes DOJ attorneys from appearing in state court.

Specifically, 28 U.S.C. section 517 provides that a DOJ attorneys “may be sent by the attorney general to any state or district in the United States to attend to the interests of the United States” in a suit pending in state court.

State supreme court decides case based on waiver

In its March 8 opinion, the Wisconsin Supreme Court affirmed the state appeals court decision, but on different grounds. It ruled that the federal government waived its ability to appeal the circuit court’s temporary injunction of IRS claims against Ambac’s segregated fund.

“In reaching our conclusion, we focus not on the signature, but on the fact that the notice of appeal itself was the only effort by the United States to involve itself with the circuit court,” wrote Justice Patrick Crooks for the supreme court. “Our case law is clear and consistent: failure to preserve issues at the circuit court means that they are waived.”

The supreme court explained that the “waiver rule” bars a party’s requested “do-over” after sitting by while other interested parties endure expensive litigation.

“The United States never appeared in the circuit court proceedings” Justice Crooks wrote. “It has acknowledged its strategic decision not to litigate in state courts. A party is entitled to make such a decision, but it is not entitled to a reversal when its strategy has ‘proved ineffective.’”

Having decided the case on grounds of waiver, the supreme court did not address whether a federal DOJ attorney can appear in state courts without a state license or pro hac vice status.

Chief Justice Shirley Abrahamson filed a concurring opinion to declare that “forfeiture,” not “waiver” is the proper term to use when a party fails to raise issues in circuit court.

Attorneys

Assistant U.S. Attorney Richard Humphrey, Madison, and Anthony Sheehan of the U.S. Department of Justice, Washington D.C., represented the United States.

Daniel Stolper and Barbara Neider of Stafford Rosenbalm LLP, Madison, and Richard Reinthaler, Peter Ivanick, Henry Ricardo, and Emily Saffittz of Dewey & LeBoef LLP, New York, represented Ambac Assurance Corporation.

Michael Van Sicklen, Naikang Tsao, and Matthew Lynch of Foley & Lardner LLP, Madison, represented Wisconsin Office of the Insurance Commissioner, Ted Nickel.